21 May 2019 — Source: Observador
The World Bank’s biannual economic report predicts that the contraction of the last two years will be reversed in 2019, with GDP forecast to grow 3.9% — and rise further to 4.9% in 2021.
Economic Recovery After Two Years of Contraction
The East Timorese economy is expected to grow 3.9% in 2019, boosted by an increase in public spending after two consecutive years of contraction caused by political uncertainty. GDP contracted 3.8% in 2017 and 7% in 2018.
The World Bank’s six-month economic report, released in May 2019, predicts this contraction will be reversed, driven by more public spending and greater private consumption.
“With the approval of the 2019 General State Budget (OGE) in February, we expect some economic recovery to occur. GDP is expected to grow 3.9% in a scenario of greater economic and political stability. Increased public spending coupled with stronger private consumption will lead to economic recovery.”
— Pedro Martins, Chief Economist, World Bank
Impact of Reduced Public Spending
The decline in public spending and the political and economic uncertainties of the past two years had a notable impact on the private sector, affecting consumer and business confidence and causing a drop in private consumption.
Key findings from the report include:
- Public spending on wages and personal benefits fell by 1–2%, failing to sustain consumption as it did in 2017
- Private investment remained relatively subdued throughout 2017 and much of 2018
- Correction only began in the last quarter of 2018, following the approval of the State Budget
External and Internal Risk Factors
The Timorese economy is described as “reasonably protected against external shocks,” but may be vulnerable to:
- Price rises in imported goods
- Falling US dollar exchange rates
- Worsening global financial conditions
Internally, the World Bank continues to flag high domestic risks, noting that political tensions “have decreased but not dissipated,” and that the Government remains incomplete in its formation.
The fiscal balance is expected to deteriorate due to:
- Higher public expenditure costs
- Lower Petroleum Fund Estimated Sustainable Income (RSE)
- Moderate domestic revenues
This remains “a key medium-term concern” for the country’s finances.
Petroleum Fund and Long-Term Outlook
The Petroleum Fund continues to see its balance reduced. The World Bank stresses the importance of protecting the fund for the population and private investors. Two key remedies are identified:
- Greater Sunrise fields: eventual production could boost petroleum revenues
- Quality of public spending: improvements can have multiplier effects on the economy
Historically, the Timorese economy has been weakening since 2008, when it achieved double-digit growth:
| Period | Average GDP Growth |
|---|---|
| 2007–2011 | ~9% per year |
| 2012–2016 | ~4% per year |
| 2017 | −3.8% |
| 2018 | −7% |
| 2019 (forecast) | +3.9% |
| 2021 (forecast) | +4.9% |
In 2017 and 2018, “negative economic growth has further contributed to a divergence from regional trends.”
Private Sector Credit: Sharp Rise Then Fall
Commercial lending to the private sector in Timor-Leste fell 2% in 2018, after an “unusual” 25% increase in 2017, which the World Bank attributes to credit lines extended to cover late government payments.
Credit levels grew steadily throughout 2017 but fell sharply in the first quarter of 2018 — a response to payment arrears affecting sectors dependent on government contracts, particularly construction.
Breakdown of Commercial Bank Lending in 2018
| Sector | Share of Total Lending |
|---|---|
| Private individuals | 41% |
| Construction | 25% |
| Commerce and finance | 19% |
| Other sectors | 15% |
The World Bank notes that access to credit is frequently cited as a major trade restriction that may discourage development. It recommends a credit guarantee system to stimulate small and medium-sized enterprises through credit risk sharing.
Non-Performing Loans
- Non-compliance rate in March 2018: ~4% (down from 42% in 2010)
- Non-compliance rate by end of 2018: ~6%
The rise at year-end is attributed to deteriorating conditions in which businesses and individuals struggled with cash flow due to payment delays.
Banking Sector: High Liquidity, High Interest Rates
The banking sector continues to be characterised by high liquidity, with a low lending-to-deposit ratio of 0.22, driven by poor financial intermediation and a large share of banking assets held abroad.
| Indicator | 2018 Value |
|---|---|
| Average lending interest rate | 13% |
| Average deposit interest rate | <1% |
| Lending-to-deposit ratio | 0.22 |
Trade Balance and Exports
The domestic economic slowdown contributed to a fall in the trade deficit in 2018, which stood at approximately $940 million — a 2% decrease from 2017.
Imports:
- Total goods imports fell 3%, mainly in vehicles and machinery
- Consumer and capital goods: $613 million
- Services: $450 million
- Primary origins: Indonesia, Singapore (ASEAN), and China
Exports:
- Total goods exports rose nearly 50% to $25 million
- Coffee accounted for approximately 95% of all exported products, benefiting from a stronger harvest than in 2017